The thought of turning $10,000 into a $1 million investment is one that many investors certainly have. Indeed, those kinds of returns, which were made possible by a number of high-growth stocks over long periods of time, are usually driven by very long-term secular growth stories. The cannabis sector and leaders such as Aurora Cannabis (TSX:ACB) have been hit hard in recent years as demand for these high-potential stocks dried up.
Part of this narrative is due to the reality that growth in the Canadian cannabis market hasn’t panned out as many analysts initially expected. With a Biden win in the White House, many thought we might finally see legislation passed that would bring cannabis legalization south of the border as well. And while certain reclassification bills have been put forward (and are likely to pass), it’s unclear what the timeline for full federal legalization will look like in the U.S. market.
There’s plenty of uncertainty around whether companies like Aurora Cannabis can provide the sort of 100X returns many investors are looking for. Let’s dive into what may drive such returns and whether these sorts of gains are even possible.
Strong position in the Canadian cannabis market
An Alberta-based producer of various cannabis products, from dried bud to gummies, vaporizers, pre-rolls, cannabis oils and other value-added products, Aurora Cannabis remains a top way for investors to play the Canadian cannabis market.
Of course, the investing thesis around Aurora Cannabis is one that’s much more complex than its current positioning in the market. It’s becoming increasingly clear that the Canadian cannabis market is one that’s increasingly saturated, at least from the production side. Retail demand has been steady but hasn’t been expanding at a rapid clip. So, like many of its peers, investors are looking for reasons to invest for the future growth anticipated to come from the company’s global growth plans.
I think there’s a lot to like about Aurora’s growth in cannabis-infused beverages and in its portfolio of aforementioned value-added products. If there’s a Canadian cannabis player with the potential to meaningfully expand into the U.S. market, Aurora should be near the top of the list.
Of course, other major multi-state operators are already building market share in the U.S market, so it may be a steeper hill to climb than many will want to acknowledge. But this is a company with much greater growth potential today than last year, given the recent regulatory shift in the U.S.
Financials need to improve for big returns to take hold
Overall, I don’t think 100X returns are likely anytime soon. Aurora Cannabis will need to see incredible top- and bottom-line growth to justify such a valuation, with likely expansion efforts into the U.S. resulting in large capital expenditures up front.
Investors who bought into the Canadian growth story before have been badly burned. However, if we’ve already hit the bottom in this market, I think substantial upside could be possible if all the right catalysts align in the coming years.
There’s just too much uncertainty for anyone to suggest this stock could be the kind of life-changing multi-bagger so many are hoping for right now. While there is certainly significant upside potential, this comes with incredible levels of risk, so invest accordingly.
